Category: Economics

Happy Halloween! It has felt like Halloween for the past 20 months or so, with ordinary Americans dressing up as surgeons or asbestos remediators in masks.

I’ve recently had occasion to take some prison galley-style JetBlue flights, in which flight attendants walk up and down the aisle looking for people who aren’t wearing masks correctly. The ticket counter at PBI has a high clear plastic barrier that makes communication between agent and customer almost impossible (while simultaneously providing no protection against COVID, according to the New York Times). The workers behind the plastic, have been stuck wearing masks for 8 hours per day for all 20 months of “14 days to flatten the curve.” I asked a 13-year veteran of the ticket counter how many of her colleagues had quit. “Everyone who could retire has done so,” she responded. She was sick of wearing a mask, found it frustrating to try to make herself understood, and did not think the mask was effective at preventing COVID infection. Like most other customer service businesses, the airport is extremely short staffed and, despite a reduced passenger volume, lines can get long (except at TSA, which seems to have infinite capacity!).

There has been a lot of media coverage regarding how few Americans are working. And, indeed, the stats do show that Americans are passionate about relaxing at home:

What I find confusing, however, is that so many Americans are working at these masks-all-day jobs (though I am grateful for their service!). It can’t be because the masks don’t bother them, since the people I’ve talked to say that they do find the masks uncomfortable. It can’t be because there aren’t any no-mask-required jobs available because, at least here in Florida, there are plenty. It shouldn’t be because it is too hard to transition to disability, because “Long COVID” is a recognized disability and the symptoms encompass almost any medical malady.

I’m not saying that labor force participation should be 0%. After all, there are plenty of high-paid masked jobs (surgeon) and plenty of medium-paid no-mask jobs (work from home, e.g.). But why isn’t labor force participation rate down closer to the Puerto Rican number (42 percent)? It can’t be fun to spend the whole day wearing a mask and asking in-a-rush airline passengers to repeat themselves.

Related:

• “4.3 million workers are missing. Where did they go?” (WSJ, 10/14; paywall-free version): More than a year and a half into the pandemic, the U.S. is still missing around 4.3 million workers. That’s how much bigger the labor force would be if the participation rate—the share of the population 16 or older either working or looking for work—returned to its February 2020 level of 63.3%. In September, it stood at 61.6%. … Of 52 economists surveyed by The Wall Street Journal, 22 predicted that participation would never return to its pre-pandemic level.

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Ever wonder what the inflation statistic would be if it included some of the big purchases that people actually make, e.g., houses? A Wall Street economist, Joe Carson, recently wrote a piece on the current inflation situation:

Including house prices in the official consumer inflation statistics would lift the reported figure to roughly 10% and rival the early 1980s. Still, excluding the non-market shelter index from the official price statistics shows consumer price inflation running as hot as it did during the oil price spike of 2008. Both represent the fastest increase since the early 1980s, illustrating the breadth and speed of the current inflation cycle.

Other measures of inflation have already exceeded the reported figures of the early 1980s. Core intermediate prices for materials and supplies, which are part of the monthly producer price report, have jumped over 20%, well above the high readings of the 1980s.

If official government inflation is 6 percent, is it reasonable to say that 4% more would be added if actual house prices were included? From the same piece:

The initial signs of a new inflation cycle appeared in the housing market. In 2020, during the pandemic, house price prices rose 10%, according to the Case-Shiller. That was more than three times faster than the gain of the prior year and the most rapid increase since 2013. Some have argued that high and rising prices are self-correcting as buyers balk at the high prices. Yet, after increasing 10%, house prices posted a 15% increase, and the latest data shows a record 19.5% increase in the past year.

19.5 percent in this one component does seem as though it could translate to 4 percent for prices overall.

House prices in our neighborhood are so high that one homeowner has subleased the backyard to a research facility:

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Related:

• “Owners’ Equivalent Rent and Price Stability” (PennMutual): In 1983, the Bureau of Labor Statistics (BLS) made a change to an integral component of inflation indexes. The adoption of owners’ equivalent rent (OER) to estimate shelter costs meant home purchases would no longer be considered a consumption expenditure but instead a capital asset or investment. OER is determined by a monthly survey of consumers who own a primary residence. The survey asks how much consumers would pay to rent instead of own their home. OER represents approximately 25% of the Consumer Price Index and 12% of personal consumption expenditures (PCE). … Why has OER exhibited such stability versus market-based measures of shelter costs? Economists have observed that owner-occupied rental estimates tend to be “sticky” relative to market-based rental costs. Homeowners tend to underestimate rent appreciation during expansionary periods and overestimate it during recessionary periods. … The idea that home purchase costs are not an expenditure but an investment is likely difficult to understand for first-time homebuyers confronted with unaffordable housing options.
• What if you want to live in your car (on “camping mode”) instead? Tesla prices were up about 10 percent in the past few months and went up another 5 percent today (Reuters)

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Modern Monetary Theory is sometimes cartoonishly summarized as “government can borrow and print unlimited money without negative consequences so long as it issues debt in its own (printable) currency.” Based on this cartoon, what the U.S. government has been doing for the first 20 months of 14 Days to Flatten the Curve is exactly the right approach.

The Wikipedia summary of MMT is more nuanced. A government that issues its own fiat money

1. Can pay for goods, services, and financial assets without a need to first collect money in the form of taxes or debt issuance in advance of such purchases;
2. Cannot be forced to default on debt denominated in its own currency;
3. Is limited in its money creation and purchases only by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment;
4. Recommends strengthening automatic stabilisers to control demand-pull inflation[10] rather than relying upon discretionary tax changes;
5. Bond issues are a monetary policy device, not a funding device.

(Note that the government’s stated inflation rate, alarming as it might seem, grossly understates costs to buy a house (real estate prices are not included) and also is not adjusted for delivery time (see Is inflation already at 15-30 percent if we hold delivery time constant?).)

One of the policy implications, according to Wikipedia:

Achieving full employment can be administered via a centrally-funded job guarantee, which acts as an automatic stabilizer. When private sector jobs are plentiful, the government spending on guaranteed jobs is lower, and vice-versa.

What we’ve seen over the 20 months of 14 days is sort of like “guaranteed jobs” in that people get a paycheck, but they don’t actually work (the paycheck is called “$600/week unemployment check,” resulting in higher-than-median wages for those who don’t work). On the other hand, the government has put most of its effort into making existing government jobs more lucrative. Government workers have gotten paid for not working (teachers who didn’t teach, librarians at home while libraries were closed, park employees at home while parks were closed) and more government workers, already earning salaries far above those in the private sector, won’t have to repay their student loans (funded by higher taxes paid by those who never enjoyed the opportunity to go to college). On balance, it seems reasonable to consider the higher-than-median-wage unemployment payments as the “centrally-funded job guarantee” that MMT proposes. And, in fact, as any employer trying to hire can attest, full employment was achieved (i.e., everyone who wanted a job had one).

Do you buy or sell stocks and real estate when the government is printing money?

MMT economists also say quantitative easing is unlikely to have the effects that its advocates hope for.[66] Under MMT, QE – the purchasing of government debt by central banks – is simply an asset swap, exchanging interest-bearing dollars for non-interest-bearing dollars. The net result of this procedure is not to inject new investment into the real economy, but instead to drive up asset prices, shifting money from government bonds into other assets such as equities, which enhances economic inequality. The Bank of England’s analysis of QE confirms that it has disproportionately benefited the wealthiest.

Let’s see if the MMT folks were right:

Check and check!

The primary inflation control mechanism in MMT, again according to Wikipedia:

Driven by fiscal policy; government increases taxes to remove money from private sector. A job guarantee also provides a non-accelerating inflation buffer employment ratio, which acts as an inflation control mechanism.

What are the Democrats who control Congress working on right now, as the headlines are filled with reports of raging inflation? Tax increases!

First, is it fair to say that MMT is actually the mainstream economic philosophy in the U.S. and has been since at least March 2020? (In other words, the folks who run the U.S. economy profess belief in neoclassical economics, but their actions reveal a belief in MMT.) Second, have the events that unfolded since then proven that MMT is correct?

Related:

• “Rising Rents Are Fueling Inflation, Posing Trouble for the Fed” (NYT): rest assured that inflation is temporary, except that you’ll pay 10 percent more for at least the full year of your one-year lease (“That’s a concern for the Fed, because housing prices tend to move slowly and once they go up, they tend to stay up for a while. Rent data also feed into what is called “owners’ equivalent rent” — which tries to put a price on how much owners would pay for housing if they hadn’t bought a home.”)
• “As Inflation Rises, Beware of the Money Illusion. It May Cost You a Lot.” (WSJ) (average people unable to comprehend that selling a house at a profit in nominal dollars is not a success when inflation has been higher than the profit)

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As part of our move to the Florida Free State, I had Everpresent scan a photo album that my mom made in 1966 (she didn’t use acid-free paper so there was no practical way to preserve it other than scanning).

Here’s the air-conditioned brand-new house that my parents purchased in Bowie, Maryland (my father was working as an economist for Census Bureau): $15,990 with $590 down and $112/month ongoing. (Deal was arranged in 1961, but the house was completed and they moved in 1962. It might have been the Cape Cod, actually, which was slightly cheaper.)

Zillow says that the median price of a single family home today in Bowie is about $500,000.

How does that compare to official inflation? $15,990 in June 1962 is worth about $145,000 today says the BLS. So a house is more than 3X as expensive in real dollars, despite the fact that the above (air-conditioned!) house was brand new. (Would $15,990 in today’s Bidie Bucks even pay for a central air-conditioning system (installed)?)

Related:

• “Accelerating Inflation Spreads Through the Economy” (WSJ, 10/13)

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From a barbecue joint in Boynton Beach, Florida: “due to the shortages of commodities within the market such as chicken wings, pork and also beef we must increase the prices from what the menu prices reflect until the market begins to normalize. … we hope to retain you as a customer as we navigate these unchartered waters.” [sic]

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I find it fascinating that the folks who run this restaurant imagine that their costs will come back down (“normalize”) at some point in the reasonably near future. For places that aren’t as optimistic about our economic future, should they all switch to big screen TVs for menu display? Prices will need to be adjusted every month or two at the current rate of inflation, right?

Related:

• Austin and Lockhart, Texas: 10 barbecue restaurants in 72 hours
• Smoke BBQ in Fort Lauderdale (the only place that I’ve found in Florida that is competitive with the better Texas restaurants)
• All will be well in the garden; There will be growth in the spring! (Dr. Fauci as Chance the Gardener)
• “Accelerating Inflation Spreads Through the Economy” (WSJ, 10/13)

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